As we enter our next economic downturn, we are told to learn the lessons of the Great Depression.
Pundits urge governments to follow Roosevelt’s example by stimulating the economy to bring about a recovery.
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Pundits urge governments to follow Roosevelt’s example by stimulating the economy to bring about a recovery.
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They blame Hoover’s “laissez faire” response to the crash of 1929 for the severity of the Great Depression.
In contrast, they claim Roosevelt turned the economy around through the bold programmes of The New Deal.
In contrast, they claim Roosevelt turned the economy around through the bold programmes of The New Deal.
Yet the idea that Hoover adopted laissez faire policies is false. He instead embarked on a programme of unprecedented interventionism. His policies included:
>Running what, at the time, was the largest budget deficit in US peacetime history.
>Running what, at the time, was the largest budget deficit in US peacetime history.
>Spending more on public works in 4 years than was spent in the previous 30 combined
>Crippling international trade via the Smoot-Hawley Tariff Act
>Raising taxes via the Revenue Act of 1932
>Introducing a broad programme of farm subsidies and loans
>Crippling international trade via the Smoot-Hawley Tariff Act
>Raising taxes via the Revenue Act of 1932
>Introducing a broad programme of farm subsidies and loans
>Encouraging wage freezes via the White House Conferences
>Restricting immigration (pictured extract from Hoover's memoirs)
>Restricting immigration (pictured extract from Hoover's memoirs)
Roosevelt took a more expansionary approach to interventionism through The New Deal, but this did not spur a convincing recovery. Private consumption (the only part of GDP linked to demonstrated consumer preference) didn’t rise sustainably above 1929 levels until after WW2.
The seemingly impressive GDP growth during the later years of the Roosevelt administration is accounted for by increases to government consumption as a result of war spending rather than production of goods demanded by consumers.
Yet, despite the evident stagnation his policies caused, pundits tell us that we should emulate Roosevelt in response to the current downturn.
The initially severe recession of 1920-21 lasted just 18 months. Had Hoover and Roosevelt emulated the contractionary policies of the early '20s (gvt spending $6.4bn->$3.3bn; interest rates 4%->7%) the early '30s may also have been a time of swift and convincing recovery.
The real lesson of the Great Depression (and 1920-23) is that we should respond to economic downturns with contractionary policy. If we instead follow the misguided policies of the 1930s, we can expect to experience long and painful stagnation, just as they did then.
